2011 (1) TMI 1172 - HC - Income Tax

Whether the appellate authorities are correct in adopting for the purpose of computation of income from capital gains, the cost of inflation index for the financial year 1992-93 instead of index for the financial year 1987-88 in view of the provisions, of s. 48 r/w s. 45(2) of the Act market value on the date of transfer that is relevant and in arriving at that market value the index cost of acquisition as prescribed on the date of transfer is to be taken into consideration and not the date of conversion, the index cost of acquisition was 223 on the date of transfer in the year ending 1993 and the index cost of acquisition on the date of conversion is 161. Therefore, the AO committed a serious error in taking 161 as the index. The appellate authorities have rightly interfered with the said assessment and have taken 223 as correct index cost of acquisition, decision in favour of the assessee and against the Revenue Whether the appellate authorities are correct in allowing deduction claimed by the assessee as revenue expenditure in respect of the payment made to State Bank of Mysore as a guarantor in the face of the fact that the borrower, namely M/s Rudra Industries sister concern of the assessee, had assets to pay the liability which were offered as security by the borrower and the payment was prompted by extraneous considerations and not necessitated by commercial expediency Held that - assessee incurred this expenditure to discharge a debt borrowed by the sister concern and thus saved the property which he had offered as security and in turn was able to make out a marketable title in terms of the development agreement. It cannot be said that the payment of the said amount does not constitute business expenditure. Both the appellate authorities on appreciation of the aforesaid material rightly held that the assessee is entitled to a deduction under the head of business expenditure and have rightly set aside the order of the AO disallowing the said deduction. In that, view of the matter, the third substantial question of law is answered in favour of the assessee and against the Revenue, appeal dismissed

Summary

Issues Involved:
1. Whether the payment made to the bank to save the mortgaged property constitutes business expenditure or capital expenditure.
2. Determination of the relevant date for assessing capital gains when immovable property is converted into stock-in-trade.

Issue-wise Detailed Analysis:

Issue 1: Business Expenditure vs. Capital Expenditure
The core issue is whether the payment of Rs. 37.25 lakhs to State Bank of Mysore to save the mortgaged property from being auctioned constitutes business expenditure or capital expenditure. The assessee, a partnership firm, had provided its property as collateral security for a loan taken by its sister concern, M/s Rudra Industries. When M/s Rudra Industries failed to repay the loan, the bank initiated legal proceedings, and the assessee, to protect its business interests and maintain clear title for property development, paid the amount due.

The assessing authority initially treated this payment as business profit rather than business expenditure. However, the appellate authority and the Tribunal held that the payment was made to maintain and protect the assessee's business interests, thus qualifying it as business expenditure. The High Court upheld this view, citing precedents from the Supreme Court, emphasizing the importance of commercial expediency and the principle that expenses incurred for the purpose of business, even if benefiting a third party, are deductible if they are commercially expedient.

Issue 2: Relevant Date for Assessing Capital Gains
The second issue involves determining the appropriate date for calculating capital gains when immovable property is converted into stock-in-trade. The assessee converted its property into stock-in-trade in 1987-88 and entered into a development agreement with M/s Unitech Ltd. The assessing authority took the index value of the property on the date of conversion (1988) for calculating capital gains. However, the appellate authority and the Tribunal held that the index value should be taken on the date of the actual sale (1992-93).

The High Court agreed with the appellate authorities, referencing Section 45(2) and Explanation (iii) to Section 48 of the Income Tax Act. It clarified that for computing capital gains, the market value on the date of transfer is relevant, and the index cost of acquisition should be based on the date of transfer, not the date of conversion.

Conclusion:
The High Court dismissed the Revenue's appeal, affirming the decisions of the appellate authority and the Tribunal. It concluded that the payment made to the bank constituted business expenditure due to commercial expediency and that the index value for calculating capital gains should be based on the date of the actual sale, not the date of conversion into stock-in-trade. The judgment reinforced the principles of commercial expediency and proper interpretation of tax provisions in assessing business expenditures and capital gains.